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THE RUSH TO DEREGULATE

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Martin Tolchin reports on Congress for The New York Times. Susan J. Tolchin, his wife, is Professor of Public Administration, George Washington University. This article is adapted from ''Dismantling America - The Rush to Deregulate,'' to be published this fall by Houghton Mifflin. By Martin Tolchin and Susan J. Tolchin HE EVIDENCE WAS CLEAR. Thousands of infants had suffered convulsions and brain damage when they were fed commercial formulas lacking essential nutrients. Congress reacted by adopting the Infant Formula Act of 1980, and the Food and Drug Administration promptly proposed stringent rules to enforce the law. In 1981, however, the newly installed Reagan Administration delayed those regulations, studied the matter for 18 months (during which time three million cans of flawed formula were sold) and finally produced a new set of rules. According to Jim Greene, a spokesman for the F.D.A., the new standards meet ''all the requirements needed to protect the consumer.'' According to a staff report prepared for the Oversight Subcommittee of the House Energy and Commerce Committee, the new rules ''adopted, virtually in every respect, the suggestions of the infant-formula industry to relax the proposed rules and add 'flexibility.' ''

Representative Albert Gore Jr., Democrat of Tennessee and author of the original legislation, believes that the revised rules are so flexible that dangerous products can still be marketed. ''This Administration's No. 1 priority,'' he says, ''is to make certain that no industry is in any way displeased or even slightly disconcerted by any action of Government.''

Only recently, in the wake of the scandal over the Environmental Protection Agency (E.P.A.), has the public begun to glimpse the depth and scope of President Reagan's deregulation initiative - the most comprehensive overhaul of the regulatory process in the history of the republic. The goal is to reduce Government involvement in business, leaving the free market free so that American business can produce a new age of prosperity. But deregulation's most dramatic result has been the dangerous unraveling of an entire skein of health, safety and other citizen protections that has been decades in the making.

At the Occupational Safety and Health Administration (OSHA), for example, the number of inspections of workplaces dropped 17 percent in the first two years of the Reagan Administration, and the penalties levied on companies plummeted 78 percent. At the Department of Agriculture, regulations were rescinded that required labels stating that pulverized tissue, bone and bone marrow were used in processed meats such as frankfurters. (''A little bit of bone or whatever you're going to get isn't going to hurt you in the least,'' says John McClung of the agency's Food Safety and Inspection Service. ''The industry argued that the label was so frightening to consumers that they wouldn't buy the product.'')

Some aspects of this regulatory overhaul have become familiar: the trims in agency budgets, for instance, that have forced program cutbacks, or the appointments to key agency posts of people hostile to the mission of their agencies. What has escaped general notice has been the primary means to the President's deregulatory ends: He has elevated the Office of Management and Budget (O.M.B.) to the position of chief regulator, challenging Congress's traditional influence over the agencies and the independence of the agencies themselves. Deregulation has been achieved, not by obtaining the repeal or revision of the laws on which the regulations were based, but by administrative fiat.

During recent months, the constitutional issues raised by this approach to regulation have been addressed in decisions by the United States Supreme Court and lower Federal courts. And O.M.B.'s resounding success - the wholesale reduction in regulations that protect the environment and the public's health and safety - may be a campaign issue in the Presidential election next year.

HE FOUNDING FATHERS gave Congress jurisdiction over commerce, and as the nation industrialized, it was Congress that created regulatory agencies, primarily to protect the interest of the business community. As a result of the consumer and environmental movements of the late 1960's, Congress set up three new agencies - the E.P.A., OSHA and the Consumer Product Safety Commission - and strengthened the powers of many other regulatory agencies. The goal was to protect the public and the worker in seeking safe workplaces, safe products and a healthy environment. One result was to increase the power of Congress and the agency bureaucrats over social policy, at the expense of the White House.

The foundation for the Reagan Administration's reversal of that situation was laid by Jimmy Carter. Confronted by a spiraling inflation rate, President Carter listened to those who insisted that regulations were a major cause of higher prices. (A steel company required to improve the air-quality equipment in its plant, for example, would simply add that extra cost to the price it charged for girders.) In 1978, he issued Executive Order 12044, Improving Government Regulations, and soon thereafter created the Regulatory Analysis Review Group, the first significant attempt to give the White House power over the day-to-day operations of the regulatory agencies.

Mr. Carter also initiated the extensive use of cost-benefit analysis as a key tool for the assertion of this power, once again providing Mr. Reagan with a precedent he would follow. Cost-benefit analysis seeks to compare the cost of a factory's new air-quality equipment, for example, to the cost of doing without that equipment in terms of the workers' health and the price society would pay for a sustained illness.

It is a much-debated approach. Mark Green, a public-interest advocate, has commented, ''The child-labor laws would never have passed a cost- benefit test.''

One of the advantages of creating the review group, Carter aides felt, was political; the group would serve as a lightning rod for attacks from those forces angered by deregulation moves. The President himself would be above the fray. Those hopes proved false when Mr. Carter tried to relax the standards set by the Department of Labor on the amount of cotton dust permitted in textile plants. The dust causes byssinosis, a serious lung disease. Labor unions and health groups attacked the change as inhumane and the textile industry attacked it as too small a step in the right direction. Eventually the Supreme Court upheld the standards, but meanwhile Mr. Carter backed down and never again intervened directly in a regulatory issue. In the process, he lost some important political capital.

EW PRESIDENTS HAVE ENtered the White House with more ambitious and well-defined goals than Ronald Reagan. His central objective was to reverse the direction of government, and the scaling back of the regulatory agencies was high on his list. Some experts thought he could hardly make a dent in the huge bureaucracy, but he was helped by the swing to the right in the country: The public seemed ready for change. What's more, he and his aides had plenty of ammunition in the form of regulatory excesses.

Just as the early agencies such as the Interstate Commerce Commission had favored their corporate constituencies, so had the later agencies such as OSHA become identified with public-interest groups. The new agencies were staffed with men and women who had worked with Ralph Nader and other public-interest advocates, and their zeal - often perceived as arrogance - enraged business leaders. The new regulations could bite deeply into corporate profits, and many company executives felt they were being harassed by unnecessary rules.

After the 1980 election, James C. Miller 3d, a burly, witty former economics professor, was named a member of the Reagan transition team and assigned to work on deregulation as part of the mission of the Office of Management and Budget. He later became a deputy to David A. Stockman, director of O.M.B., and was appointed chairman of the Federal Trade Commission in 1981. ''We hit the ground running,'' Mr. Miller says of the Administration's early deregulation efforts. ''All the work was done in the transition period. We knew what we were doing the minute we came in. Stockman let me loose and said, 'Be tough!' ''

Nine days after his inauguration, President Reagan imposed a 60-day freeze on all new regulations. He quickly set about putting like-minded people to work at the agencies. ''All of our appointees have religion,'' Mr. Miller says. ''We want to make sure OSHA is no longer a four-letter word.'' And the President himself made sure his top aides remembered their mission. Not a Cabinet meeting went by, says Mr. Miller, without the President referring to ''some regulatory horror story.''

Mr. Reagan also created a regulatory task force and appointed Vice President Bush as chairman. Mr. Bush sent letters to thousands of businessmen and civic leaders, inviting them to submit recommendations for regulatory reform. He asked small businessmen for ''documentation of instances in which specific regulations could be changed in order to increase benefits or decrease costs.'' The Administration never bothered to analyze the bulk of the thousands of responses that poured in, for the intent of the invitation had already been accomplished: to convey to the business community the President's determination to ease the burden of regulation.

C. Boyden Gray, the counsel to the Vice President's task force, underlined the point in a speech to the Chamber of Commerce. ''If you go to the agency first,'' he told the businessmen, ''don't be too pessimistic if they can't solve the problem there. That's what the task force is for.''

At the heart of the President's deregulation effort was Executive Order 12291, issued Feb. 17, 1981. It gave O.M.B. the power to oversee all major regulations issued by the executive branch agencies. The order directly discouraged the agencies from developing new regulations. And if a new regulation was to be advanced, the agencies were required to present extensive cost-benefit analyses to justify it.

Despite its power, O.M.B. tries to keep a low profile. ''O.M.B. pretends it isn't there,'' says one official. But by demanding ever more information and raising one objection after another, the budget office exercises de facto control over the agencies' agendas and output. The mere fact that O.M.B. questions a proposed regulation can cause an agency to drop the proposal.

Examples of this effect cropped up in documents obtained under subpoena by a subcommittee of the House Energy and Commerce Committee. ''The record showed,'' says Patrick M. McLain, a counsel to the subcommittee, ''that from June to September of 1981, at least seven proposed regulations were returned to the agencies. Six were never resubmitted.'' Among the six were regulations that would have prohibited hang gliders from using airspace around airports and another dealing with the blood alcohol level of pilots.

Mr. McLain is also concerned about the ''chilling effect'' he says the budget office procedures have caused. ''What we want to know,'' he says, ''is how many regulations are never submitted at all.''

The first major test of the budget office's new powers came over a set of E.P.A. regulations developed by the Carter Administration to implement the Clean Water Act. The regulations sought to prevent private industry from dumping toxic chemicals into municipal sewage treatment plants incapable of handling them. The danger was that these chemicals, including lead and mercury, might work their way untreated through the sewage plants and into rivers and lakes, impairing the quality of the drinking water and possibly entering the food chain. Lead, for example, damages the nervous system and is particularly toxic for children; mercury has been linked to brain damage and loss of vision. Under the new rules, some 60,000 industrial plants were required to treat the chemicals before discharging them into the environment.

But in the spring of 1981, the E.P.A. suspended key portions of the regulations just three days after they had taken effect. Several electroplating companies, for example, were told by E.P.A. they could postpone their efforts to comply with the new pretreatment standards involving the discharge of eight toxic pollutants, including cyanide and lead.

A lawsuit initiated by the Natural Resources Defense Council, an environmental public-interest group, revealed that the suspension had in effect been ordered by the budget office, pending an economic analysis that the E.P.A. staff said would take 15 months. The agency had already issued one economic- impact statement during the four years of preparation before the regulations were allowed to go into effect.

In the course of the lawsuit, the evidence showed that the three Government units involved in the decision to suspend the rules - O.M.B., the Vice President's office and E.P.A. - had been contacted by representatives of affected industries and companies, including the Chemical Manufacturers Association and the Ford Motor Company. There was no record, however, of any conversations with environmental groups.

Eventually the United States Court of Appeals for the Third Circuit ordered a reinstatement of the regulations because the E.P.A. had violated the Administrative Procedure Act. This 1946 law requires that Federal agencies, when planning to make, amend or repeal a regulation, must notify the public of that intent and provide an opportunity for the public to express its views on the matter. In the hazardous-waste case, the court ruled that the suspension of rules had occurred ''without notice and the opportunity for comment'' by the public.

At a Congressional hearing investigating the regulatory role of O.M.B., Representative Mike Synar, Democrat of Oklahoma, pursued this issue with Boyden Gray: ''Do all people have the right to call you, or just a select group of people? Can my mom and dad who are upset about something call directly to you?'' ''Absolutely,'' Mr. Gray said.

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At the same hearing, James Miller denied categorically any connection between O.M.B.'s meetings with corporate representatives and the withdrawal of specific regulations - and that denial included his discussions of regulatory relief with the Chemical Manufacturers Association a month before the hazardous-waste rules were suspended. ''You are telling me under oath that you did not even mention hazardous waste?'' Representative Gore asked. Mr. Miller replied: ''I am telling you, to the best of my recollection, that topic did not come up.''

The intrusion of O.M.B. into regulatory matters has raised a host of legal questions. For example, legal and administrative precedent prohibits the introduction of new material in a regulatory proceeding after the public comment period on a particular rule has officially ended. Should that happen in the course of a meeting between, say, the budget office and the E.P.A., does it violate that precedent? Must the meeting become a part of the public record of the new regulation?

Boyden Gray, for example, insists: ''The public has no more right to know what a member of the President's staff says to an agency than a Congressman who communicates privately with his staff.'' (In the Carter Administration, the argument for such privilege was known as the ''One Big Happy Family'' theory.) Critics say that the public deserves to know all the elements that have gone into a regulatory decision.

According to advocates like Mr. Gray, the whole point of the current arrangement is to eliminate the open conflicts between business and government that had inhibited regulatory progress in years past.

Critics acknowledge the relative inefficiency of conducting business in public, but they are concerned about what goes on behind closed doors. The influence of industry lobbyists, for example. ''We were meeting with the director of the Bureau of Drugs,'' says a mid-level official at the Food and Drug Administration, ''on a drug we had been studying for over a year and whose toxic effects included cancer and bladder trouble. The biggest concern from everyone was, 'Who's upset?' meaning which industry would be upset. Everyone is extremely cautious about anything they let through that would upset industry.'' Murray L. Weidenbaum, who was President Reagan's first chairman of the Council of Economic Advisers and has since returned to academe, defends the budget agency's role. ''O.M.B. needs to be the President's agent,'' he says. ''It is the only agency with a broad array of concerns.''

But critics worry that the budget office, for all its broad scope, has a narrow perspective. They fear that the budget office, as the Government's fiscal watchdog, tends to put greater weight on the cost side of the cost-benefit scale and less on the side of public health and safety. And they see that tilt in the hundreds of actions by executive- branch agencies to cut back regulatory safeguards affecting workers, the elderly, the ill and other people at risk. The O.M.B., on the orders of the President, sets the tone and serves as clearinghouse and chief authority for all important deregulatory actions: The Administration proposed, for example, the elimination of many nursing-home rules, including some governing fire safety and assuring that no attendants with communicable diseases are hired. Ultimately, the proposals were abandoned in the face of protests from senior citizens' groups and the American Public Health Association. The antiarthritic drug Oraflex was approved in April 1982 as part of an industry-inspired speedup of the drug- approval process by the Food and Drug Administration. Oraflex had been rejected by the agency two years earlier because of reported links to deaths from liver and kidney failure, and was banned in Britain. Eventually, the drug was voluntarily recalled by its American manufacturer, Eli Lilly and Company, and is no longer on the market. Under the rubric ''enforcement actions,'' the F.D.A. lumps such things as seizures of defective foods and drugs and injunctions to prevent companies from manufacturing defective products. In its first year, the number of enforcement actions initiated by the Reagan Administration was about half the annual average during the Carter Administration. Shortly after he was sworn in, James G. Watt, Secretary of the Interior, slowed the activities of the Office of Surface Mining. ''This is now a captive agency,'' says an official of the Office of Surface Mining. ''It is totally a captive of the mining interests. There are no inspectors out in the field now; they only inspect in response to citizen complaints.'' He had just returned from a trip to Tennessee where he found that the surface-reclamation programs that are part of the regulations governing strip mining were being ignored. ''I have seen moonscapes on mine sites,'' he said.

Budgetary trims in coal- mine regulation have had other effects. Between 1978 and 1981, the number of coal- mine inspectors was cut by the Mine Safety and Health Administration from 1,940 to 1,684; during that same period, mine deaths increased 50 percent to 153. Richard L. Trumka, president of the United Mine Workers, blames the increase in fatalities on the reduction in inspectors and in the total mine safety budget. Last year, under union pressure, the agency increased the number of inspectors by 205. Congress has since called for an additional 85 inspectors.

The mine agency's director, Ford B. Ford, has initiated a new policy of ''compliance assistance plans'' whereby inspectors are encouraged to give advice to companies in violation of safety regulations rather than initiate a punitive lawsuit. This switch from an adversarial to a cooperative approach, on the part of Government agencies, has occurred in many regulatory agencies. Some companies that had once voluntarily cleaned up their wastes because of the threat of a lawsuit now tend to drag their heels.

President Reagan quickly achieved what President Carter had begun: the legitimization of the budget office as regulatory manager. Among the results have been the politicization of the regulatory agencies and an important change in the political balance of power among the White House, Congress and the agencies.

The degree to which a ''deregulated'' agency can become the handmaiden of industry became evident in a scandal that erupted last winter in which the Environmental Protection Agency was, once again, the focus. Six Congressional committees investigated agency irregularities over a period of several months; more than 20 appointees, including the administrator, Anne McGill Burford, were ultimately forced to leave. (Rita M. Lavelle, cleared earlier of contempt-of-Congress charges, was indicted earlier this month on five felony counts of lying about her actions when she headed

the E.P.A.'s toxic-waste cleanup program. One of the charges was that she had falsely denied the effect of ''political considerations'' on the cleanup of toxic-waste sites.)

The chief target of the Congressional inquiry was the Superfund, under which companies that dump toxic wastes contribute to the cleanup. The Federal Government uses the fund to award grants to private contractors. Such companies were also required to submit to 10-year reviews of their dump permits. But the Reagan Administration awarded some companies lifetime permits. In other cases, Congressional committees charged, agreements between agency officials and industry representatives allowed companies to avoid billions of dollars in cleanup costs.

The agency also became politicized to a degree previously unknown. Announcements of Government grants for cleaning up wastes, for example, were carefully coordinated with the gubernatorial and Congressional campaigns of Republican candidates.

The Reagan Administration's deregulatory successes have diminished the influence of Congress in regulatory matters. With agency budgets cut to the bone by the Administration and the President and his top aides firmly in control, Congress can no longer use the threat of budget trims to keep the executive branch in line.

By the time of the midterm elections last year, however, there were signs of a political backlash against the Administration's deregulatory programs. Environmental concerns were considered crucial in several races. The narrow re-election victories of two Republican Senators with strong environmental records - Robert T. Stafford, of Vermont, and John H. Chaffee, of Rhode Island - were achieved largely because of the support of environmentalist groups.

And in recent months, these issues have once again emerged. The polls show that the public is increasingly willing to pay the cost of high environmental standards. Last April, a New York Times/CBS poll found that 58 percent agreed that environmental improvements should be made ''regardless of cost.'' Eighteen months earlier, the figure was 45 percent.

Many in Congress believe that the Administration's efforts to help business have cast it in an anti-environmental posture. Increasingly, the reduced enforcement of health and safety regulations is attracting attention in the press.

Even the Administration has become aware of the public's image of it as hostile to the environment: Last month, William D. Ruckels- haus, the new administrator of the E.P.A., made headlines when he told reporters that the Administration, in focusing on economic issues, had misread its mandate on the environment.

Within the past two months, three Supreme Court decisions have roiled the regulatory waters and, temporarily at least, strengthened the independence of the regulatory agencies. Two of these decisions effectively wiped out a means Congress has been using to exercise control over the regulatory agencies. When Congress ceded broad powers to the agencies as part of the explosive growth of social legislation in the 1970's, it reserved the right to veto the regulations of many of those agencies. It was this legislative veto that the Court declared unconstitutional. In one of the cases, for example, the Court voided a Congressional veto of a Federal Trade Commission rule under which used-car dealers would have had to tell customers about defects in the cars for sale.

The third Court ruling concerned the 1981 decision by the National Highway Traffic Safety Administration to end the 12-year effort to require either airbags or automatically closing seat belts in automobiles. The agency move was praised by the three top auto companies, and assailed by consumer groups and insurance companies. ''It condemns to utterly needless death tens of thousands of Americans who will be killed in car crashes just in the coming decade,'' warned the Insurance Institute for Highway Safety. The Administration contended that increased public education to persuade more Americans to use safey belts was a better approach, leaving the choice up to the individual and keeping one more Government regulation off the books.

The Supreme Court held that the safety agency's decision had failed to abide by administrative procedures. Associate Justice Byron R. White, who wrote the opinion, said that before rescinding a regulation, ''the agency must examine the relevant data and articulate a satisfactory explanation for its action.''

What the long-term effect of these decisions will be remains uncertain. Neither the President nor Congress is likely to permit a major increase in the independence of the agencies. The House of Representatives, for example, reacted rapidly to the Court's disapproval of the legislative veto. It voted to strip the Consumer Product Safety Commission - which happened to be the first agency to come up for a Congressional authorization after the Court ruling - of its ability to issue regulations.

The Administration, meanwhile, has shown signs of wanting to cool the deregulation controversy. There have been approaches by the President's men to Congressional leaders, looking toward resolving some of the conflicts. Mr. Ruckelshaus has pledged vigorous support of the agency's traditional goals and the Administration is now at least paying lip service to a variety of environmental rules. This month, the Administration task force was disbanded because, as Vice President Bush explained, ''the executive branch has done what it can'' and the next steps are up to Congress.

Yet as long as the budget office continues its behind-the-scenes push for deregulation, and the President essentially dominates the regulatory process, the network of public protections is in danger. In fact, preserving the integrity of the regulatory process was a theme of the Supreme Court decisions.

The politicization of enforcement procedures is the chief threat. Whether he is a Democrat or a Republican, a President with the whip hand over the regulatory agencies is likely to bend enforcement rules in the direction of his friends - toward consumer groups or toward regulated industries. President Reagan has demonstrated how quickly and easily a determined President can dominate regulatory decisions.

Regulations are the connective tissue of our society, the major protection against the excesses of technology whose rapid advances threaten man's genes, his air and water, his life itself. Americans cannot allow any weakening of this essential line of defense against the excesses of an industrial society.

A version of this article appears in print on August 21, 1983, on Page 6006034 of the National edition with the headline: THE RUSH TO DEREGULATE. Today's Paper|Subscribe